Learning from the Joneses : Technology Spillover, Innovation Externality, and Stock Returns

This paper studies the asset pricing implications of technology spillover, an important externality in innovation. While technology spillover enables firms to produce a variety of products that better satisfy their customers' love for variety, such benefits are procyclical, and investors therefore demand higher returns for holding these stocks. Using patent and R&D data from 1982 to 2014, I find that firms with more technology spillover earn 7.7% higher annualized returns than firms with less technology spillover. Exploiting two quasi-natural experiments, I find that the effect of technology on stock returns is strengthened (attenuated) when there is an exogenous increase (decrease) in the flow of information across firms. These findings highlight the importance of innovation externality on stock returns